William and Anne Abernathy leased a West Memphis service station and convenience store to Griffith Petroleum, Inc. (GPI) in 1992. The ten-year master lease, with renewal options, required GPI to pay the Abernathys' lender and to make an additional monthly payment to the Abernathys. It treated untimely rent and insolvency as defaults but did not prohibit assignment or subleasing.
In 1996, GPI entered an agreement titled "Sublease Agreement" with Maref Quran. In 1997, Abdulazize Adous was added as a subtenant and eventually became the sole operator. Adous paid rent to GPI, which was supposed to forward the money to the lender and the Abernathys. The record did not show that the Abernathys knew of the sublease until the dispute arose.
GPI failed to transmit rent in early 2001. After an unlawful-detainer action was filed, GPI and Coastal C-Mart paid three months' rent into the court registry, which was distributed to the Abernathys. When GPI again failed to pay, Adous tendered rent directly to the Abernathys, but they refused it. Adous sued for specific performance and began depositing monthly rent into the registry. The Abernathys then terminated the master lease based on GPI's nonpayment and later on its insolvency.
The circuit court held that Adous was a bona fide assignee of the master lease and that equity should prevent forfeiture of his interest. The Abernathys appealed, arguing that Adous was a sublessee whose possessory rights ended when GPI defaulted and that equitable relief was improper.
Issue #1
Whether the Abernathys preserved their challenge to the trial court's characterization of Adous as an assignee.
Holding
Yes. The challenge was properly before the appellate court.
Reasoning
The issue arose only when the trial court, in its posttrial findings and conclusions, characterized Adous as an assignee. Before then, the parties had consistently referred to the arrangement as a sublease, so the Abernathys had no earlier opportunity to object to an assignment theory.
In an equity case, a party need not make a contemporaneous objection to the court's findings, conclusions, or decree in order to obtain appellate review. The court therefore rejected Adous's procedural-bar argument.
Issue #2
Whether Adous was an assignee of the master lease or a sublessee under GPI.
Holding
Adous was a sublessee, not an assignee.
Reasoning
The distinction mattered because an assignee acquires privity of estate and a direct landlord-tenant relationship with the original lessor, while a sublessee's right to possession is derivative of the original tenant's leasehold. When the original lease is validly forfeited, a sublessee ordinarily loses possession with the original lessee.
Arkansas determines whether a transfer is an assignment or sublease primarily by the parties' intent, rather than solely by whether the entire remaining term was transferred. Here, the agreements were expressly titled subleases, and the parties and their lawyers uniformly described the relationship as a sublease throughout the pleadings and trial.
The payment structure also reflected a sublease: Adous paid GPI, not the Abernathys or their lender. That arrangement treated GPI as Adous's landlord and did not create direct rent liability to the original lessors.
GPI retained a contractual right to repossess the premises without terminating the sublease. That retained right supported the conclusion that GPI had not fully relinquished its leasehold interest, as it generally would in a true assignment.
Although Adous paid the same rent due under the master lease, agreed to observe its terms, and received an interest roughly coextensive with the remaining term, those facts did not overcome the parties' clear and consistent intention to create a sublease.
Issue #3
Whether the Abernathys waived termination rights by accepting rent from the court registry.
Holding
No. The record did not establish an intentional waiver.
Reasoning
Waiver requires the knowing and intentional abandonment of a known right. It may arise from conduct inconsistent with an intent to rely on that right, but the relinquishment must be deliberate.
The registry payment was made by GPI and Coastal C-Mart. William Abernathy testified that he did not know Coastal C-Mart was Adous, and that testimony was the only evidence concerning his knowledge of Adous's role in the payment.
Abernathy also testified that he did not learn of GPI's insolvency until after the registry funds were accepted. Thus, the evidence did not show that the Abernathys knowingly accepted Adous's rent while aware of GPI's insolvency or intentionally surrendered their right to terminate the master lease.
Issue #4
Whether the absence of an express forfeiture clause prevented the Abernathys from terminating the master lease and recovering possession.
Holding
No. The lease and Arkansas unlawful-detainer law permitted the Abernathys to seek possession after default.
Reasoning
Although a tenancy generally cannot be terminated for breach of a covenant absent an express forfeiture provision, this lease gave the Abernathys all remedies available at law or in equity upon default.
Arkansas's unlawful-detainer statutes provide a lessor a means to recover possession of leased premises. In this setting, that statutory remedy served the practical function of a forfeiture remedy, so the lack of a clause using the word "forfeiture" did not bar termination and repossession.
Issue #5
Whether equity should prevent forfeiture of Adous's sublease despite GPI's nonpayment and insolvency.
Holding
No. Equitable relief was not warranted once Adous was properly classified as a sublessee.
Reasoning
Courts generally disfavor forfeitures, but Adous had no privity of estate or direct landlord-tenant relationship with the Abernathys. Preventing forfeiture would effectively impose on the Abernathys a direct leasing relationship with Adous that they had never chosen or contemplated.
As a sublessee, Adous's interest rose and fell with GPI's interest under the master lease. Adous knew he was a sublessee, agreed to comply with the master lease, and therefore could not reasonably claim surprise that his occupancy depended on GPI's continued performance.
The termination rested not only on unpaid rent but also on GPI's insolvency. Even if Adous was willing and able to pay rent, he could not cure GPI's insolvency. Equity should not strip the Abernathys of their contractual and legal ability to terminate the master lease on that independent ground.